Baseball, Taxes and the $200 Million Dollar Man

Max Scherzer recently signed an unprecedented contract with the Washington Nationals in which he will be paid $210 million over 14 years. Multiple teams were vying for one of the league’s top pitchers, but the Nationals were the ones who were eventually able to woo him. There were probably multiple reasons (roughly 210 million if I had to guess) that Scherzer signed with the team, but one of the biggest factors was, you guessed it, taxes.

Sports agents and executives have structured some creative contracts in the last few years. Some have been successful, others, like ex-NHLer Ilya Kovalchuk’s, have caused long-term issues. In this instance, both sides negotiated a deal that was not only legal, but, from a tax perspective, brilliant. They took advantage of a law that has been in place since 1973: the Home Rule Act. This act specifically states that income earned within the District of Columbia is not subject to taxation if the individual that earned the income lives elsewhere. Scherzer maintains a residence in Florida (a state that provides residency for many of sports biggest names) which does not assess state income taxes. This means that a good portion of Scherzer’s salary (including a potential $50 million bonus) will not be subject to state or local taxation. Pretty savvy deal by both sides if you ask me.

Professional athletes tax returns are some of the more interesting returns to prepare each year. Although Scherzer will be exempt from local taxation in D.C., he will still need to pay state taxes for any away games in states that assess taxes. I think it is fair to say that Scherzer will call Florida home for a while. He will earn $105 million after his 7-year stint with the Nationals is complete. Which means, if he retires at the end of his deal, his income will only be taxed in his home state. As long as he remains in Florida (or one of the other states that do not impose a state tax), he will save millions in taxes.

The Nationals are now the favorite to win the World Series at 5 to 1. If they can achieve this feat, Scherzer (and the fans) should be thanking the good ol’ Home Rule Act of 1973.